ODM - Opportunity is in the Wind

First, here is a May 2010 film from Financial Times, which was done during the wave of 10 suicides at Foxconn (Han Hoi) in Shenzhen (click "MORE")

It's a pretty fair piece. It doesn't romanticize or demonize the Shenzhen factory, and it has interview with the employees which I think are less "sensational" than the piece produced on NPR's This American Life in January. This article from the French Magazine L'Usine Nouvelle (New Factory) is also well worth hitting the google chrome "translate" button.

This factory campus is certainly nothing at all like the ugly and polluting conditions at textile plants upstream from Guiyu. But the way workers are coming from Western Chinese Provinces to get jobs and save money (they pocket all earnings, the free room and board is similar to the draw of USA fishing vessels in Juneau), I'm reminded of a similar industrial wave... freed slaves in the USA, moving to Chicago, Boston, New York, and LA. And immigrants from Guatemala, Honduras, El Salvador, and Mexico to jobs at paper mills here in the USA...

The main difference is that China's change appears to us as monochromatic. Westerners fail to see the Hong Kong, Taiwanese, Mandarin, Cantonese, etc., as Chinese in Shenzhen see themselves ... a melting pot of different races and different colors and different tongues. I want to explore the unique advantage Americans have in understanding what's going on, both inside China, and to understand the relationship we could have had with the developing world, through e-waste trade, refurbishing, and other good enough markets. It's a bit of a long post, but it's illustrated (complete with a still of Carol Burnett as Scarlett OHare).

Yesterday I wrote about ODMs, and in particular Wistron, which is another example of a Taiwanese Geek rising to exceed Michael Dell and Steve Jobs.

Outsourcing between the gals

I've been a fan of Lin (the Tech not the Knick) since 2004. We were visited in Middlebury by a Chinese CRT SKD buyer who bragged about going way back with Simon Lin, to the days when they were manufacturing (and remanufacturing) CRT monitors as "contract manufacturers".

The weekend news, that Wistron is opening big new plants in Western China, as part of China's plan to share the economic wealth (and stop the flood of immigrants from the West, lining up for jobs in Shanghai and Guangzhou), is bigger than Boeing's move from Washington. There is more to think about, more thought-recycling....

Are Taiwanese businesses going to "win the peace" over the Formosa straight? It would seem that China has a lot more to lose by attacking Taipai than it has to fear from USA warships.

Are factories in Western China designed to sell more to Chinese, Indian, and non-OECD buyers? It's a move that makes devices cheaper, in higher numbers... which seems aimed at the "Good Enough" market.

Will China continue to raise environmental laws and enforce them? Perhaps enforcing them against a Chinese billionaire will be easier than enforcing them against a Communist-Party owned factory.

Will China become the prime vendor, both of used goods and affordable new goods, to Africa, India, and South America? If most of the makers are non-OECD, and most of the buyers are non-OECD, maybe USA's surplus electronics will be as irrelevant as a confederate dollar.

Did someone save the curtains?

There is a revolution taking place, all over the world. Information, trade, markets, the world is a flat prairie fire of change and evolution. Deals are being cut every day, and every day decisions are being made on reuse which assume the USA might sell something to you and then call your national EPA to report you for buying it. No one has time to distinguish between the fair trade do-gooders and the anti-ewaste doo-gooder watchdogs.

If the USA wants to burn, or rather shred, its working assets before the equality of nations catches up... well, it can spite its own face if it wants. It's as if the confederates are burning their own houses, lest they fall into the hands of "The Help".

These changes are happening in years, not in decades. And they are happening in very predictable ways, very similar to the way industry moved from Massachusetts' Blackstone Valley down to the Carolinas. This is about the same kind of predictable social revolution that we read about in Gone with the Wind. We should not feel comforted by the idea that 83% of the world will consist of primitive, barefoot children.

In researching Wistron for yesterday's post, I ran across this term ODM, Original Design Manufacturer. It belongs on my evolutionary list for sustainable development, under the "repair blessing" theory. ODM is the name for George Washington Carver or Booker T. Washington... when someone who used to work for you, and they don't anymore, and you have to deal with them as businessmen... except in this case, Carver and Washington live in a flat, flat world with lots of other people to buy from and sell to if you fail to "get it".

Below is the case for evolution from consumer reuse to SKD to contract manufacturer to ODM.

Contract Manufactuer (CP). Entrepreneur is so good that big OEMs pay him to manufacture for them as a subcontractor. Foxconn is the largest and most famous.

ODM - a company which produces its own intellectual property (patent, invention, design), makes it, and then licenses someone else's name or distribution network.

And the Master Race of Corporations Emerges:

Lenovo is a final example of the CP telling the contractor (IBM) to give over the car keys and they take over as the PC business. But not many Americans know about ODM businesses like Wistron, Quanta, Inventec, Complal, Huawei, ZTE Corp, ...or even the true meaning of Foxconn (Hon Hai Tech Corp).

This master race of high tech manufacturers is the lastest in the evolution of "just in time inventory theory". The Japanese model of subcontracting out work (which I studied in business school in the late 80s) was to prioritize some core component, the most expensive, newest, most difficult to manufacture component. It is popular with Adam Smith devotees, as it dovetails with the theory that organizations excel by doing that which they do best.

In the 1970s, Sony and Panasonic made the whole TVs in big factories in Japan. In the 80s they kept the CRT furnaces and production, but allowed the assembly and lower grade boards to be made in Taiwan, Korea, Singapore, etc. It was really hard to capitalize the CRT (cathode ray tube) furnace, and there was little threat that someone would take away the idea or production.

Then the Chinese Communist Party decided to make CRTs, lots and lots of them, flooding the market in the late 1990s and early 2000s. Protectionist tariffs emerged (still in place in Mexico - every TV we send for recycling must be chronicled by country of manufacture). But the Chinese were flooded back by used CRT cores from USA and Europe and Japan, as people started buying LCDs. China's Communist Party had decided to produce, new, something that the West already had in surplus - cathode ray tubes that last 20 years, but were out of fashion in the wealthy markets where electronics companies made their dough.

But in the south of China, Taiwanese businesspeople, many the original outsource-ees of Japan and the USA, were evolving as they had learned and setting up assembly shops in highly-educated, low wage markets like Shenzhen and Guangzhou. They convinced USA companies, like Dell, HP, IBM, Apple, Gateway, to take the Japanese JIT model another step. They would subcontract to these Taiwanese the whole enchilada, including brand new technologies like pads, smartphones, and LED-LCD production. The Japanese companies had to follow suit with most mature electronics manufacture (South Korea still keeps a lot of core production, and is no longer included in BRICK - now BRIC - because it no longer resembles an "emerging" market in any way. This is SK/Samsung decade, even in rock music, fodder for a future blog).

Had she shreded the curtains, would've been worse

When the entire device is made by a factory like Wistron, Foxconn, or BenQ, the USA OEM relies very very heavily on enforcement of patent and trademark law. Think of the profitability of offshoring ALL your costs, and all you have to provide is your name and your patent.

Lenovo and Acer were just two Chinese companies that became their own OEMs, severing any pretense of being American brands (Acer purchased Gateway, Lenovo bought out IBM's Thinkpad and Ideacentre PC business). HP has recently teetered on the brink of selling off its PC business, presumably to the people who make their PCs. Chinese people.

The already slippery slope of JIT outsourcing and Adam Smith Economics got slippier when the Chinese and Taiwanese engineers started proposing their own designs and contributing intellectual, engineering work. Wistron (Acer's parent) and Foxconn became full fledged manufacturers, but no one had heard of them. They had everything except a brand name.

Remember Polaroid? Get ready for "Kodak" displays. The Taiwanese found they can find bankrupt or struggling USA companies with a good brand name, and license their labels. Design, production, packaging, everything happens in China. It's the ODM business. Best Buy is already as much a "manufacturer" as Apple is. Amazon is rapidly becoming a big name in manufacturing. UPS is arguably the largest electronics company in the USA, using its distribution system to make USA markets accessible to Chinese ODM companies.

In the ODM system, there is no ownership of the device patent by the USA company. Microsoft and Google have some advantages, for now, by retaining the software code that runs the devices... but they are an Ubuntu away from direct sale between China to Western China (or India, South America, Africa) world, where intercepting patent-infringing goods is not clear in the USA, and without a leg to stand on as the Emerging Markets (83% of the world) buy more of the product than we do.

China Unchained from USA Patent Trademark Law

Using trademark and patent laws as the sole barrier to entry into your market relies on you being the biggest consumer of the product. That worked pretty well a decade ago. If a Shanzhai OEM made an Apple product without Apple's blessing, it was a crate of sour grapes if they couldn't sell them to the richest consumer markets.

Why is Wistron building electronics factories in Chengdu? In part for lower wages, in part for incentives the Chinese government is willing to offer. But also because being farther away from the ports (farther away from USA markets) is not as big a concession in a world where China, India, and Africa buy and throws away far more electronics than they ever imported as e-waste, even in the worst of times. Because the rest of the world is now consuming electronics without us. ISuppli projects that smart phone production will DOUBLE in 2012. Some of that growth will be Americans. But not most of it. America is going to be a small dog in this electronics zoo. Our customs agents won't be able to enforce patents on goods that aren't imported here or sold here.

This is why Hong Kong's legal court system is vitally important, and why the Chinese participation in the WTO is critical. If you really do invent something, and really deserve a patent or trademark, you won't be able to restrict sales to 90 percent of buyers any longer.

Is this the End?

The USA is still terrific, and when India and China catch up, it doesn't mean we have declined. But that's a lot of income that is being outsourced, and we need to shepherd our resources. We need to stop shredding things that other people want. We're at risk of being Scarlet O'Hara, without a curtain.

What the USA has to do is get off its high horse. We cannot afford to shred up working assets. California is a model for how screwed up and stupid product stewardship laws were in the past decade. California thought it was saving recycling funds by making OEMs like HP and Samsung pay for the shredding, but the OEMs slipped CA a big big mickey in writing the terms to include planned obsolescence, in hindsight.

It's as if someone made a deal that they would pay the cost of towing the car, as long as you give up the right to resell it (for scrap metal, parts, or reuse/resale). Rather, its as if the state made that deal for you. You can still sell your device, but when you buy the next device you are already pre-taxed by the system to pay for the destruction whether you do so or not, and are taxed so much that you may as well just give the device back rather than risk being accused of... you know... exporting. That's California's version of "sleeping with colored chicks" in the deep south in the 1960s.

It was painful ten years ago when California started destroying monitors and displays, and outlawing trade with Geeks of Color. Frankly, those geeks now don't give a damn.

Now that our advantage in manufacturing tech assets is long gone, and our advantage in supplying gently used assets is undermined, is this the end of USA's role in Fair Trade Recycling? Oddly enough, what I have found is that the USA's biggest asset in dealing with Geeks of Color in the emerging markets is our reputation for tolerance. Africans trust us a little bit more than they trust Chinese vendors. South Americans trust our goods a little bit more. We have wasted a decade of our assets, which were more valuable when cell phones and display devices were not yet produced at ten-fold the rate in a two year period. Let's not waste 50 years of Peace Corps volunteers experience gained insights into Emerging Market x OECD B2B trade.